A sharp decline in economic output in the first three quarters of 2024 notwithstanding, India’s long-term growth story is believed to be unchanged. A growth rate of 6.5% is expected over the next half decade, which will help the country remain the fastest growing economy in the world.
However, China, Japan, and South Korea grew more than 8% consistently during their fastest growth phases. Whether growth of 6% and above will be enough for a country that needs to generate more than 8 million jobs annually until 2030 is the big question – and whether this rate of growth will be enough to close the growing wealth gap and allow for generational mobility.
There is a view that the slowdown in growth is simply a recovery after the data distortions caused by the pandemic and subsequent stress on an unusually low statistical basis. Finance Minister Nirmala Sitharaman said the below-expected GDP growth of 5.4 per cent in the second half of FY25 was only a “temporary blip”.
Economist Neelkanth Mishra and his team at Axis Bank described the loss of momentum in India’s economy in the first half of the current fiscal as “slow”, due to “unintended monetary tightening”. In October, Japanese trader Nomura said that India’s economy is in a phase of “cyclical growth”, and described the Reserve Bank of India’s estimate of GDP growth at 7.2% as “overconfidence”. Weeks later, the RBI was forced to match its forecast by more than half a percentage point.
Good
There is a clear improvement in the current economic picture.
Government spending
Spending already looks set to pick up after the election dust has settled. The recent reduction in the cash reserve ratio (CRR) has freed up cash held by banks through the RBI.
The capex cycle appears to have resumed in some sectors, increasing capital formation, Mishra said, adding that this growth will be led by investment. Also, spending cuts are expected to support growth in the coming financial year. But the government will have to continue to do the hard work.
Economists also say that the GDP shock for Q2 FY25 – another set of lower numbers is likely in Q3 – simply reflects the continuation of the normalization of the growth path after the collapse of the base effect of the pandemic, where the economy has weakened in an unusual way. That may partly explain the decline in growth from 8.6% to 7.8% to 6.7% to 5.4% in 2024.
“…It’s not that we think the second quarter decline is a data artifact and as more data comes in, it will automatically improve. The numbers will be revised higher or it could be something simple, seasonal… Or it could be something more important like the ability of the government to use the reserves… We will be on track to achieve… between 6.5-7 percent for the entire fiscal year. But…
After several quarters of potentially better economic results, GDP growth is expected to reach 6.5%, which would mark the real growth rate returning to normal. The question posed by the RBI’s overestimation – and the subsequent correction – is this: did the central bank keep interest rates higher than necessary because it projected a very positive picture of GDP growth? However, inflation remains at the upper end of the permissible band, and food prices are almost at double digits in terms of inflation – that somewhat strengthens the argument for sticking to higher prices, and compounds the RBI’s problems going forward.
The low growth in investment is mainly due to the decline in public investment; this may change in the second fiscal quarter and later. Another indicator is the increase in the backlog of capital goods companies which indicates that investment activity is likely to increase going forward. For example, in utilities, the pivot from renewables back to thermal energy, which accounted for a large part of capex between 2010 and 2015, could give a boost to industrial activity, given that no thermal energy has been added in the past 6-7. years.
According to Mishra, the empty election calendar in the states in 2025, provides a window for reforms. But the appetite – even to restart pending reforms such as Labor Codes – appears to be waning.
Possible recovery of MSME
In two other disappointing trends, analysts see a potential silver lining.
Business growth is slowing, in part due to fading consumption growth, but the opposite may be true. Former Chief Statistician Pronab Sen said that Micro, Small and Medium Enterprises (MSMEs), which have been hit many times due to shocks such as demonetisation, the implementation of GST, and the closure of Covid-19, may return to business, and compete with the company. sector.
Although more information is needed in this regard, two other signs suggest this possibility: first, there is availability of consumption in rural areas although the growth of the city is impressive; second, the Periodic Labor Force Survey numbers show an improvement in paid employment, which may be partly due to an increase in casual employment and MSMEs. Multiple MSMEs would mean that the two branches of the K-shaped recovery would be reduced.
Labor statistics show another positive: women’s participation is increasing, especially in rural areas. About 39.6% of women with a bachelor’s degree and above were reported to be working in FY24, compared to 34.5% in FY18. For women with a high school education level, these figures were 23.9% and 11.4%.
Resource growth
India’s services surplus as a share of GDP rose in October 2024 – a positive result. Regarding India’s profit share structure in global services exports, Mishra and his team say that the fragmentation of global service chains, the rapid expansion of cross-border telephone bandwidth, and the rise of remote working are adding to demographic trends. to support the growth of Indian services exports to developed markets.
In November, India’s sales of services surpassed exports of goods as IT exports continued to register strong growth amid weak demand for goods in the West, and higher transport costs due to disturbances in the Red Sea, according to official data released by the Ministry of Commerce. Going forward, however, India’s IT exports, on a consolidated basis, appear vulnerable to new technologies such as AI.
They are not bad
A lazy investment
Performance is declining for many companies, and investment is struggling. Tata Consumer Products Ltd executives have flagged concerns about “softening” urban demand; those at Nestle India said big cities were pressure points and blamed “muted demand” partly on high food inflation. Automakers point to concerns about demand, blaming heavy rains and an election-induced slowdown. All this can contribute to growth and job creation.
But why is private investment struggling, despite pre-Covid business tax cuts and government investment mandates?
To release the so-called animal spirits, companies must feel positive about the future, and not have to look back. One major obstacle in promoting a suitable investment environment is India’s tax laws and their administration, said Arvind P Datar, Senior Advocate, at the National Convention of All India Federation of Tax Practitioners on December 16.
Companies are also cutting labor costs. Real wage and salary expense growth in listed non-financial corporations – a proxy for real urban wages – slowed to 0.8% in Q2 FY25 from 1.2% in Q1 FY25, and down from 2.5% in FY24 and 10.8 % in FY23, Nomura said.
The savings-investment gap
A decline in the household savings rate may present another challenge. The latest Financial Stability Report of the RBI shows that household savings declined to 5.3% of GDP in FY23 from 7.3% in FY22, sharply below the 8% average of the last decade. Gross household savings is the sum of a household’s money and investments, including deposits, shares and bonuses, minus any money they owe, such as loans and other debts.
Meanwhile, household debt has risen sharply. Annual borrowing is at 5.8% of GDP, the second highest level since the 1970s. A large part of the savings also flows into the financial markets through the banking industry, which is another problem.
Smooth credit growth
Credit growth has been slowing – households, which borrow heavily to finance home purchases, have not done so since 2021. For a long time, the industry has been adjusting this, but this has decreased since the beginning of 2023. Overcapacity and a lack of appetite for new projects are seen as limiting the industry’s ability to secure new credit.
In such a situation, government spending financed by bonds is the only logical way to create new debt in the economy, according to Mishra, but most of this new debt issued is used to clean up old ‘hidden debt’ at the local level.
Unless there is a fundamental change in the use of financial resources to stimulate the economy, high growth will not occur. Bank lending to MSMEs can be something to look into, especially if personal credit is down and companies are unwilling to lend.
While bad loans have been on the decline, there is fresh concern over the sharp rise in NPAs in the personal loan and credit card segment. Both types of loans are unsecured and have high interest rates. In November 2023, the RBI increased the risk weighting of banks’ exposure to consumer credit, credit card receivables, and non-banking financial companies.
Financial intelligence
At the institution, financial consolidation has been a consistent theme. The projected reduction in fiscal deficit from 6.4% to 5.9% of GDP in FY24 will stabilize public debt at around 83% of GDP – a promising indicator of sustainability, given India’s growth trajectory, according to the IMF.
But the competitive loosening of the purse strings by the districts causes a financial crisis. The RBI has raised concerns over the large increase in expenditure by states on various subsidies, including farm loan waivers and cash transfers.
Axis Bank’s India Outlook report said that by 2025, 14 states will have some kind of program targeting 134 million women, which is about 20% of all women in India. These programs cost the government about Rs 1.9 lakh crore every year, or about 0.6% of the country’s GDP.
Although this transfer of goods has helped low-income families by giving them more money to spend mainly on food such as flour, onions and tomatoes, the availability of these goods has not increased enough, which has caused the price of food to increase, said the report. .
Anil Sasi is Business Editor, The Indian Express
NEXT: the weather
Why should you buy our Subscription?
You want to be the smartest in the room.
You want access to award-winning journalism.
You don’t want to be misled and misinformed.
Choose your subscription package